Foot-Dragging USDA May Help Consumers as $7 Milk Looms

By Alan Bjerga -
Dec 31, 2012

The specter of milk jumping to $7 a
gallon as U.S. farm programs expire probably will be held off
because regulators will need time to write new pricing rules,
even if Congress fails to avert a so-called dairy cliff.

House and Senate agriculture committee chiefs yesterday
backed a one-year extension of the 2008 farm bill, trying to
stave off higher prices that emerge when expired rules force the
U.S. Department of Agriculture to revert to policies set in
1949. Neither chamber has voted on the plan, or on narrower
alternatives, with both houses set to resume work today. Still,
should Congress fail to deal with milk costs that may double
without action, price increases may be slowed while the USDA
seeks to turn back time, analyst Dave Kurzawski said.

“Everyone won’t start selling their butter and cheese to
the U.S. government on Jan. 2,” Kurzawski, a consultant at INTL
FCStone Inc. in Chicago, said in an interview. “We are going to
need to find a resolution to this, though.”

The most recent farm law, passed in 2008, expired Sept. 30.
Without a replacement, agricultural programs return to earlier
rules that are the basis of all subsequent legislation. The
effects of that transition have been delayed because of the
growing seasons of different crops. Dairy, a year-round
business, is the first major commodity affected. In November,
the USDA estimated the price of a gallon of fresh whole milk at
just under $3.54.

Draft Bill

The draft bill agreed upon by the farm-panel leaders would
extend the expired farm law through Sept. 30, provide disaster
aid for producers affected by this year’s drought, and make
changes to milk policy. The new dairy program would manage
supply partly by setting production limits for farmers who
enroll in a market-stabilization program.

House Speaker John Boehner, an Ohio Republican, has opposed
that concept, calling it worse than current policies that he
termed “Soviet-style.” The proposal wasn’t on a list of
measures released last night to be considered by the House
during today’s session.

President Harry S. Truman’s farm policy from 1949 required
the government to buy supplies of a product until its price
approached “parity” with the cost immediately before World War
I. Adjusted for a century of inflation, the USDA milk-support
price today would be $39 per hundred pounds, more than double
the dairy futures price in Chicago today.

Price Supports

This price-support policy, which once brought rivers of
dumped milk and free cheese for the poor, was gradually
abandoned as U.S. agriculture law became more market oriented.

Massive government purchases “would dramatically increase
government spending, would force consumers to pay significantly
more for dairy products, and would impose long-term damage to
the dairy industry,” the Washington-based International Dairy
Foods Association wrote in a letter to Agriculture Secretary Tom Vilsack last week.

The group, which represents Kroger Co. (KR), the largest U.S.
grocery chain, and Nestle SA (NESN), the world’s biggest food company,
urged the USDA to “proceed in a thoughtful and deliberate
manner” in any move to implement the 1949 law. It said today it
opposes the dairy plan included in the proposed farm-bill
extension for potentially limiting the supply of milk by
encouraging farmers to cap production.

‘Ironic’ Threat

“It is ironic that the threat of higher dairy prices for
consumers, caused by the possible implementation of the 1949
Act, is being used to force Congress to pass a new program that
will result in higher prices,” Jerry Slominski, the group’s
senior vice-president for legislative and economic affairs, said
in a statement.

The National Milk Producers Federation, an organization of
farmers and dairy cooperatives, has supported the supply-
management concept.

Vilsack hasn’t offered specifics as to how the USDA would
intervene in milk markets, while warning consumers that inaction
on a new farm bill will have far-reaching consequences.

“Consumers, when they go in the grocery store, are going
to be a bit shocked when instead of seeing $3.60 a gallon for
milk, they see $7 a gallon,” he said yesterday on CNN’s “State
of the Union” broadcast. “That’s going to ripple throughout
all of the commodities if this thing goes on for an extended
period of time.”

Bill Plans

Should Congress not reach a deal on either a separate
extension of agriculture legislation or its inclusion in a plan
to avert the so-called fiscal cliff of tax increases and
spending cuts that are set to take effect tomorrow, a new farm
law may be delayed until at least March.

The House Agriculture Committee plans to start drafting new
legislation on Feb. 27. Its Senate counterpart will debate a new
bill “soon,” should an extension fail, Chairwoman Debbie Stabenow, a Michigan Democrat, said yesterday. The Senate passed
a five-year plan in June, followed by the House farm panel in
July. The full House never voted on a plan. The Congress that
convenes Jan. 3 must restart work on a farm bill.

In the meantime, implementing 1949 rules would “take a
considerable amount of time,” House Agriculture Committee
Chairman Frank Lucas said in an e-mail last week. The Oklahoma
Republican said Vilsack should follow the federal rulemaking
process, including a public comment period, before moving ahead.

Delayed Effects

Even if the USDA immediately embraced the 1948 law, the
effects might not reach consumers for weeks, said Mike North, a
senior risk-management adviser at First Capitol Ag in
Platteville, Wisconsin. Swift action on rules is unlikely, he
said.

Government purchases would follow specifications that not
all processors could immediately meet, he said in a telephone
interview. Then, products must be packaged and distributed to
retailers. Because the commodity is only about half the total
cost of a dairy product, doubling the price paid to farmers may
make $4 milk “only about $6 milk once it reaches the
consumer,” he said.

Still, the possibility of higher prices may push up milk
futures, and raising consumer costs, said FCStone’s Kurzawski.
“The uncertainty isn’t good for the industry,” he said.

Farm bills, which Congress usually passes every five years,
set policy and fund USDA programs including food stamps and crop
subsidies. They frequently lapse before a new law is passed. The
bill that ended in September took effect on June 18, 2008, more
than nine months after its predecessor expired.